The earlier stages of the pandemic were particularly rough for cruise companies. Sailings were put on hold, and that meant revenue screeched to a halt. Today, more than a year after ships returned to the water, things are looking brighter for industry heavyweight Carnival (CCL 1.49%) (CCK 0.29%).
The world's largest cruise ship operator may have even reached a key turning point. Carnival's cash from operations turned positive in the second quarter, and bookings show that people are excited about setting sail. Let's take a closer look at why everyone is talking about Carnival.
Rising occupancy
Carnival is making significant progress after a couple of very difficult years. Now, about 90% of the company's fleet is back in service. Occupancy rose to 69% in the second quarter from 54% in the previous quarter. And close-to-home cruises have even reached 100% occupancy.
Looking ahead, bookings for future sailings almost doubled from the previous quarter, Carnival said. In fact, the second quarter was the strongest for bookings since the start of the health crisis.
All of this is significant because it shows that travelers are back -- and they want to cruise. The pandemic didn't change their feelings about this popular type of vacation.
Of course, the problem today is that rising inflation may hurt customers' buying power. And they may delay cruise vacations. But cruises also may gain some customers who want to travel but are watching their budgets. Cruising usually offers great value, compared to other sorts of vacations.
As for Carnival's financials, things are looking better, too. The company predicts positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the third quarter of this year. That's as occupancy rates continue to increase. In the second quarter, revenue rose 50% from the first quarter.
Interest-rate headwind
Of course, potential interest-rate hikes could impact Carnival's variable-rate borrowings. That represents another headwind in the coming months. But it's important to keep in mind that Carnival has been able to manage during much more difficult times -- like when the pandemic kept its ships at the dock. So it seems unlikely the current economic situation would destroy Carnival's recovery.
Carnival also has what it takes financially to face potential headwinds. It ended the quarter with $7.5 billion in liquidity.
What's ahead for Carnival? The company has made some changes that should help it return to profitability more quickly. It has replaced smaller, less-efficient ships with nine bigger ships. They include a better mix of premium-priced balcony cabins and other features that could drive more revenue for the company.
Now let's take a look at valuation. Carnival's price in relation to sales has plummeted since late last year. It's fallen to about two times sales.
CCL PS Ratio data by YCharts.
That's a steal, even considering the headwinds Carnival faces at the moment. Why do I consider the price cheap? Because Carnival has made its way through the worst of the crisis and has shown us demand for its cruises is growing.
That said, Carnival still remains risky. The pandemic isn't over, and economic woes could make it difficult for the company in the coming months. So Carnival shares are best left to aggressive investors. In any case, though, as Carnival continues along the road to recovery, it's sure to be one of the companies everyone is talking about.
